The choice of Adair Turner as chairman of the new Pensions Commission is good news for all of us. After a major inter-departmental battle, the terms of reference for the commission were circumscribed in the Pension Green Paper as: “To keep under review the regime for UK private pensions and long-term savings [and] to make recommendations to the Secretary of State for Work and Pensions on whether there is a case for moving beyond the current voluntarist approach.”
The intention was clearly to steer the commission away from the dangerous waters of the state pension system. However, the choice of a tough, independent-minded chairman rather circumvents the deliberately restrictive remit. It is simply not possible to judge the suitability of the private pension environment without examining its interaction with the state system and we can expect some searching re-evaluation to emerge from the commission in the next few years.
It is worth reminding ourselves of developments in another recent investigation into the pension landscape. The Pension Provision Group, set up as an independent organisation by the Government immediately after 1997, made a number of high-quality reports on a very similar set of issues. To the discomfort of ministers, the group then began politely to disagree with some of the Government's policies, which were supposed to have been informed by the PPG's own analysis. The organisation has now transformed itself into the more openly critical Pensions Policy Institute, whose website provides an extremely good source of informed comment and analysis on policy issues in this area.
One of the issues that the institute has addressed is the state pension age. This is a question where everyone seems to have a different answer. Should it go up to 67, 70, 72 or higher? Only one organisation believes that the issue is not deserving of serious discussion – the Government.
In an environment of steadily rising life expectancy with extra resources desperately needed to finance pension reform, this is not a sensible position on which to be isolated. It is an issue which the Pensions Commission should address.
The reason for the Government's reluctance to face the issue is clear. The state pension age is a particularly charged political question. Attitudes to retirement and the length of retirement vary dramatically across socio-economic classes. Health inequalities mean that a 65-year-old man with a professional or managerial background can expect to live more than three years longer than a 65-year-old partly-skilled or unskilled worker. Put brutally, poor people die earlier.
People from higher socio-economic classes also tend to enter work after more years of education. They are less reliant on state pension provision due to building up hig-her private savings and they are often doing work which gives them status and satisfaction. If the age at which they can claim their state pension were to go up a few years, they might be relatively unconcerned. For others, perhaps working in heavy manual trades, the delay of their main source of retirement income might be a bitter blow.
One of the Green Paper's better, albeit very tentative, suggestions was that the age of entitlement to the state pension might be related to the length of a person's working life so that someone who started work at 18 would have to wait three years less than someone who took a degree before entering the labour market.
A number of issues need to be investigated. First, what effect would this have on the average state pension age and the cost of public pensions? The answer depends on the length of time set as the entitlement period. Currently, men need 44 years of National Insurance contributions to qualify for the full basic state pension. An increase to this number would have much less divisive effects than an increase in a set state retirement age. Another issue that would need to be investigated would be the disincentives on those considering further or higher education. Would the thought of delaying their state pension dissuade people from taking courses?
The debate about the state pension age has an air of unreality. Every informed individual can see the merits of discussing the issue seriously but the Government appears to be paralysed by concerns about creating massive public opposition. The lack of such opposition to the planned equalisation of the women's retirement age between 2020 and 2030 should provide a comforting precedent.
Raising the state pension age by two years would reduce public spending, on IPPR/PWC calculations, by 0.7 per cent of GDP in 2050, that is, around 15 per cent of total current public pension spending, and could be used to change and simplify the basis of state provision. Raising the average state pension age by two years could have a similar effect. One useful contribution that the Pensions Commission could make is to push forward a sensible debate on this issue.
Richard Brooks is a research fellow at the IPPR